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Why I’d keep buying the BT share price

The BT Group (LSE: BT-A) share price has fallen by 50% over the last two years. For long-term shareholders it’s been a bitterly disappointing experience. For value hunters, the shares appear to be a tempting bargain, albeit with some hefty risks attached.

As a fairly recent buyer of the stock, I’m in the value-hunting camp. My hope is to lock in a 6%+ dividend yield and enjoy some capital gains as the firm’s turnaround plan delivers results. Am I being realistic? Today’s third-quarter figures suggest some progress has been made, but there’s still a lot to do.

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Going out on a high

BT’s outgoing chief executive Gavin Patterson has faced a lot of criticism over the last few years. But today’s results suggest the turnaround plan he agreed with chairman Jan du Plessis could be working.

Although revenue fell 1% to £17,558m during the nine months to 31 December, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) were unchanged, at £5,553m. This allowed Patterson to advise the market that full-year profits are now expected to be at the top end of the firm’s guidance range.

The main area of improvement was the group’s core UK consumer business, which includes the EE mobile network. Sales rose by 4% to £2,785m in this division, while adjusted EBITDA climbed 15% to £643m.

Despite this positive news, no significant profit growth is expected until the 2020/21 financial year. Incoming boss Philip Jansen, who replaces Patterson from 1 February, will have a lot to do.

What about the dividend?

This year’s forecast dividend of 15.4p per share should be covered 1.7 times by forecast earnings of 25.6p per share. For a mature business like BT, I’d normally suggest that this was a comfortable level of cover.

However, the group faces a lot of conflicting calls on its cash. Net debt rose from £9,627m in March 2018 to £11,114m at the end of the year. This was mainly due to the group having to make a £2bn one-off payment into its pension scheme. Despite this, BT’s pension deficit still stood at £4.5bn following this payment, so more cash may be needed in the future.

Patterson’s turnaround strategy includes a plan to cut costs by £1.5bn by the end of the 2020/21 financial year. I don’t think BT has all that much room to grow in the UK market, so in my view successful cost-cutting will be needed to boost profits and protect the dividend.

If the incoming CEO believes a cut is needed, Jansen will want to do it as soon as possible. If this doesn’t happen, then I think there’s a good chance the dividend will survive.

Why I’d buy

BT is a complex, mature business that will always need to spend money to keep its networks up to date. But it also generates a lot of free cash flow and has quite decent profit margins.

Chairman du Plessis is highly regarded and obviously believes he can improve the performance of the business. At current levels, the stock trades on a 2019 forecast P/E of 9, with a 6.6% dividend yield.

In my view that’s cheap, but not distressed. I think BT is likely to be a good buy at this level, and one worth continuing to hold following today’s results.

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Roland Head owns shares of BT GROUP PLC ORD 5P. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.